(18) INCOME TAXES

The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations. Under the provisions of federal and state statutes, Premier LP is not subject to federal and state income taxes. For federal and state income tax purposes, income realized by Premier LP is taxable to its partners. The Company, PHSI and PSCI are subject to U.S. federal and state income taxes.

On December 22, 2017, the U.S. government enacted the TCJA that made broad changes to the U.S. tax code. Most notable to the Company was the reduction in the U.S. federal corporate income tax rate from 35% to 21% for the first taxable year beginning on or after January 1, 2018. Due to the timing of the Company's fiscal year, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28.1% for our fiscal year ended June 30, 2018, and 21% for subsequent fiscal years. In accordance with U.S. GAAP, the impact of changes in tax rates and tax laws is recognized as a component of income tax expense from continuing operations in the period of enactment. Accordingly, the Company has remeasured its deferred tax balances as of the enactment date.

Concurrent with the enactment of the TCJA, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting required under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional amount on its financial statements. If a company cannot determine a provisional estimate to be included on its financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately prior to the enactment of the TCJA. With this in mind, the Company has prescribed such provisional relief under SAB 118 by incorporating various estimates regarding timing and determination of temporary difference recognition when calculating components of its deferred tax balances. While the Company is able to provide reasonable estimates of the impacts related to the TCJA, the final impact may differ from these estimates, due to, among other things, changes in interpretations, assumptions, additional guidance that may be released by the Internal Revenue Service and other actions that we may take that are yet to be determined.

In connection with its analysis of the impacts of the TCJA, the Company has recorded a net provisional tax expense of $210.4 million in fiscal year 2018 which consists of $224.9 million net deferred tax expense associated with the remeasurement of the Company’s deferred tax assets and liabilities offset by $14.5 million of deferred tax benefit associated with the release of valuation allowances related to certain U.S. federal tax attributes that are now expected to be fully realized. The Company has not completed its accounting for the income tax effects of the TCJA. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SAB 118.

Significant components of the consolidated expense for income taxes are as follows (in thousands):



	Year Ended June 30,
	2018		2017		2016
Current:
Federal	$	22,103	$	16,638	$	19,765
State	4,141		4,614		4,242
Total current expense	26,244		21,252		24,007
Deferred:
Federal	232,673		49,392		15,703
State	317		11,170		10,011
Total deferred expense	232,990		60,562		25,714
Provision for income taxes	$	259,234	$	81,814	$	49,721

The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rates of 28.1%, 35.0%, 35.0% for fiscal year ended June 30, 2018, 2017 and 2016, respectively, is as follows (in thousands):



	Year Ended June 30,
	2018			2017			2016
Computed tax expense	$	145,015		$	185,952		$	99,709
Partnership income not subject to tax	(70,257		)	(85,142		)	(85,063		)
State taxes (net of federal benefit)	12,901			9,823			664
Remeasurement adjustments and other permanent items	(53,151		)	(78,998		)	1,051
Expense (benefit) on subsidiaries treated separately for income tax purposes	(983		)	18,660			(7,497		)
Change in valuation allowance	(33,106		)	26,829			36,279
Deferred tax remeasurement	256,787			9,950			8,080
Other	2,028			(5,260		)	(3,502		)
Provision for income taxes	$	259,234		$	81,814		$	49,721
Effective income tax rate	50.2		%	15.4		%	17.5		%

The increase in the effective tax rate from the prior year is primarily attributable to the deferred tax expense associated with the remeasurement of deferred tax balances as a result of the TCJA, partially offset by the deferred tax benefit attributable to the release and remeasurement of valuation allowance and the reduction in the statutory rate from 35.0% to a blended statutory rate of 28.1% as a result of the TCJA. The lower effective tax rate in fiscal year 2017 was due to the one-time gain related to the remeasurement of the 50% equity method investment in Innovatix to fair value upon acquisition of Innovatix and Essensa.

Deferred Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2018 and 2017 are presented below (in thousands):



	June 30,
	2018			2017
Deferred tax asset
Partnership basis differences in Premier LP	$	298,306		$	473,193
Stock compensation	18,347			23,037
Accrued expenses	32,543			44,096
Net operating losses and credits	35,444			47,629
Other	12,103			11,856
Total deferred tax assets	396,743			599,811
Valuation allowance for deferred tax assets	(58,681		)	(91,787		)
Net deferred tax assets	338,062			508,024
Deferred tax liability
Purchased intangible assets and depreciation	(49,855		)	(71,994		)
Other liabilities	(152		)	(1,774		)
Net deferred tax asset	$	288,055		$	434,256

At June 30, 2018, the Company had federal and state net operating loss carryforwards of $115.4 million and $144.9 million, respectively, primarily attributable to PHSI. The resulting federal and state deferred tax assets are approximately $24.2 million and $5.4 million, respectively. The federal and state net operating loss carryforwards generated prior to fiscal year 2018 expire between the years ending June 30, 2019 through June 30, 2037, unless utilized. Under the TCJA, the Company’s net operating losses generated in fiscal year 2018 and beyond cannot be carried back to prior tax years but can be carried forward indefinitely. A valuation allowance was established for a portion of federal and state losses as the Company believes it is more likely than not that all or a portion of these losses will not be realized in the near future.

At June 30, 2018, the Company had federal research and development credit carryforwards of $10.2 million. The federal credit carryforwards expire at various times between the years ended June 30, 2020 through June 30, 2037, unless utilized. A valuation allowance was established as the Company believes it is more likely than not that all or a portion of the federal and state credit carryforwards will not be realized in the near future.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Annually, the Company assesses the future realization of the tax benefit of its existing deferred tax assets and determines whether a valuation allowance is needed. Based on the Company's assessment, we have concluded that it is more likely than not that a portion of the deferred tax assets will not be realized in the future. As a result, the Company recorded a valuation allowance of $58.7 million against its deferred tax assets at June 30, 2018. The valuation allowance decreased by $33.1 million from the $91.8 million valuation allowance recorded as of June 30, 2017. The decrease is primarily related to $31.9 million associated with the aforementioned remeasurement of deferred tax assets and $14.5 million associated with the release of valuation allowance as a result of the TCJA, partially offset by a $13.3 million increase in valuation allowance associated with current year operations.

As of June 30, 2018 and 2017, the Company had net deferred tax assets of $288.1 million and $434.3 million, respectively. The June 30, 2018 balance was comprised of $305.6 million in deferred tax assets at Premier, Inc. offset by $17.5 million in deferred tax liabilities at PHSI and PSCI. The decrease of $146.2 million in deferred tax assets was primarily attributable to $224.9 million in net reductions to deferred tax assets and liabilities in connection with the remeasurement associated with the previously mentioned decrease in the U.S. federal corporate income tax rate, partially offset by $76.4 million of deferred tax assets recorded in connection with the exchanges of Class B common units that occurred during the year ended June 30, 2018, pursuant to the Exchange Agreement.

Unrecognized Tax Benefits

The Company recognizes income tax benefits for those income tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions. The reserve for uncertain income tax positions is included in other liabilities in the Consolidated Balance Sheets. A reconciliation of the beginning and ending gross amounts of the Company's uncertain tax position reserves for the years ended June 30, 2018, 2017 and 2016 are as follows (in thousands):



	Year Ended June 30,
	2018			2017			2016
Beginning of year balance	$	5,043		$	4,381		$	3,436
Increases in prior period tax positions	12,965			101			318
Decreases in prior period tax positions	(179		)	(870		)	(201		)
Reductions on settlements and lapse in statute of limitations	(611		)	(22		)	(721		)
Increases in current period tax positions	1,261			1,453			1,549
End of year balance	$	18,479		$	5,043		$	4,381

If the Company were to recognize the benefits of these uncertain tax positions, the income tax provision and effective tax rate would be impacted by $7.4 million, $2.8 million and $2.8 million, including interest and penalties and net of the federal and state benefit for income taxes, for the years ended June 30, 2018, 2017 and 2016, respectively. The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. The amount of accrued interest and penalties was $0.9 million, $0.3 million, and $0.4 million at June 30, 2018, 2017 and 2016, respectively.

The Company has determined that it is reasonably possible that its existing reserve for uncertain income tax positions at June 30, 2018 will decrease by $12.2 million in the next twelve months, primarily related to the closing of ongoing audits.

Federal tax returns for tax years ended June 30, 2013 through 2017 remain open as of June 30, 2018. The IRS commenced an examination of PHSI's tax returns for tax years ended June 30, 2013, 2014 and 2016 in the first quarter of fiscal year 2018. The examination of the June 30, 2013 tax return was previously closed without any adjustments. As of June 30, 2018, the IRS has not proposed any adjustments to those returns and is expected to close the examination in the year ended June 30, 2019. Further, the Company is subject to ongoing state and local examinations for various periods. Activity related to these examinations did not have a material impact on the Company’s financial position or results of operations.

The Company made cash tax payments of $24.9 million and $26.1 million during the years ended June 30, 2018 and 2017, respectively.